Senate Passes Cardholder Protection Bill

Riding a wave of anti-bank, pro-consumer sentiment, the U.S. Senate today voted 90 to 5 to pass unprecedented credit-card industry reforms that would help millions of cardholders now struggling to pay their debts.

Surprise interest-rate hikes, shifting due dates and times for monthly payments, marketing credit cards to minors and college students, and excessive fees would be outlawed under the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (S. 414), or Credit CARD Act. The bill passed with strong support from President Barack Obama, who held a town-hall meeting on credit cards in New Mexico last Thursday, and who summoned card-company executives to the White House in April, where he sternly warned that "anytime, any-reason rate hikes and late-fee traps" had to end.

"It is the first time ever that we've dealt with reforms in the credit card industry. It's a major step forward," said Sen. Christopher Dodd, the Connecticut lawmaker who sponsored the bill with Sen. Richard Shelby, the ranking Republican on the Senate Banking Committee.

The Senate bill provides more consumer protections than the version of a credit-card reform bill passed April 30 by the U.S. House of Representatives. The newer bill rewards cardholders for good behavior by decreasing their APRs if they've paid their bills on time for six months, and bans retroactive interest-rate increases, except when the cardholder is more than 60 days late with a card payment. The card issuer must review the cardholder's account six months after increasing the interest rate and, if the review warrants, return the APR to the previous, lower level. The Senate bill also allows fines up to $5,000 for individuals affiliated with a card issuer who violate the act.

The House bill -- the Credit Cardholders' Bill of Rights -- sailed through in a 357-70 bipartisan vote. It allows retroactive interest-rate hikes if an account-holder is more than 30 days late with a card payment. Both the House and the Senate bills allow interest-rate hikes when promotional, or "teaser," rates expire, when the account has a variable interest rate, and when the card user reneges on terms of a workout plan for debt repayment. Both bills also prohibit interest-rate hikes during the first year of a new account.

Other provisions of the Senate bill include:

• 45 days' advance notice of significant changes in credit card terms.

• banning universal default and double-cycle billing.

• Prohibiting overlimit fees unless consumers agree to allow transactions that exceed their credit limits to go through rather than be denied.

• fees for late payments, over-limit charges or other penalty fees must be reasonable and related to the violation.

• extending the life of gift cards and gift certificates so that they cannot expire within five years of activation.

• banning dormancy or inactivity fees on gift cards unless there has been no activity in a 12-month period.

• banning credit cards for people under the age of 21 unless they have adult co-signers or show proof that they have the means to repay the debts. College students must get permission from parents or guardians to increase credit limits on joint accounts they hold with those adults.

• requiring that card issuers disclose how long it would take to pay off credit-card balances if cardholders make only minimum payments each month, and how much users would have to pay each month if they want to pay off their balances within 12, 24, or 36 months.

House and Senate leaders must now iron out the differences between the bills before submitting a final version to President Obama to sign. Although the two versions are similar, both offering more consumer protections than those included in federal rules scheduled to take effect on July 1, 2010, the bills take different approaches to timing.

The House bill would take effect 12 months after enactment or by June 30, 2010, whichever comes first. A provision to give consumers 45 days' advance notice of interest-rate increases would take effect 90 days after enactment.

Most of the Senate bill provisions would take effect nine months after enactment -- except for the requirement to give 45 days' advance notice of major changes in terms, which takes effect 90 days after enactment, and the reduction in interest rates after six months of good payments and gift-card expiration, both of which take effect 15 months after enactment.

If signed into law by Memorial Day -- as President Obama desires -- the bulk of the legislation would start by February 2010, with 45-day advance-notice requirements beginning by the fall. The majority of consumer protections in the Senate bill would begin about four months earlier than the federal rules' July 1, 2010 start date.

Like the federal credit-card rules, the House and Senate bills provide protections only for consumer credit card accounts. Business and corporate credit cards are not covered by the federal rules or the proposed law. A proposed amendment to extend consumer protections to businesses with fewer than 50 employees failed to reach a vote.

As debate over the bill progressed last week, senators offered more than 30 amendments, opening the floodgates on several hot-button credit-card issues, among them: capping interest rates on credit cards at 15 percent, limiting interest-rate hikes to only 7 percentage points above previous rates; requiring new card applicants to produce identification to show they are not illegal aliens or terrorists attempting to get credit cards; and requiring that money on stored-value cards be declared at the U.S. border to thwart money laundering.

Not everything about the Senate bill deals with credit cards. One provision added as an amendment by Sen. Tom Coburn, an Oklahoma Republican, allows visitors to national parks and refuges to legally carry licensed firearms. That measure passed 67-29.